I am a long-term holder of Brookfield Infrastructure Partners LP (BIP.UN) in a registered account. I understand that the related corporate entity, Brookfield Infrastructure Corp. (BIPC), is generally more suitable for non-registered accounts due to more favourable tax treatment of the dividends. However, BIPC’s share price is trading at a premium of about 38 per cent to BIP.UN. At such a large price differential, is BIPC still the better choice for non-registered accounts?
Essentially, what you’re asking is whether the spread between BIP.UN and BIPC, measured on a percentage basis, will widen or narrow in the future. My crystal ball is in the shop right now, so I am not going to make any specific predictions. But here are a couple of things we know for certain, along with some important context.
First, since BIPC began trading on March 31, 2020, it has handily outperformed BIP.UN. The corporate shares have produced a total return – assuming all dividends were reinvested – of about 88 per cent, compared with about 36 per cent for the limited partnership units. With the benefit of hindsight, I wish I had replaced BIP.UN with BIPC in my model Yield Hog Dividend Portfolio, but you can’t win them all. (View the model portfolio online.)
Second, because BIPC’s share price has outperformed, its yield has fallen sharply relative to BIP.UN’s. An investor buying BIPC today would receive a yield of about 3.5 per cent, compared with about 4.8 per cent for BIP.UN. So, from an income standpoint alone, BIP.UN is now the better choice. Note that both securities pay the same US$1.53 annually and both have been raising their payouts at the same clip, about 6 per cent each year, thanks to growing cash flow from the company’s portfolio of infrastructure assets, which includes utilities, toll roads, pipelines, communications towers and data centres. The key difference is that BIPC’s dividend qualifies for the Canadian dividend tax credit, whereas BIP.UN’s distribution consists largely of foreign dividend and interest income, Canadian interest and return of capital.
If both securities send investors the same amount of cash every quarter, why has BIPC produced stronger returns? Well, when Brookfield Infrastructure Partners spun out BIPC as a new company almost three years ago, it said the motivation was to attract a larger investor base. Specifically, it was aiming to increase demand from U.S. retail investors, who would benefit from a more favourable tax structure, and from institutions “who are currently unable, or prefer not to, own partnership units,” it said. Another goal was to broaden Brookfield Infrastructure’s eligibility for inclusion in stock indexes, which in turn would presumably boost demand from exchange-traded funds that track those indexes.
Judging by BIPC’s superior share price performance, the plan seems to have worked. In addition, the fact that BIPC has only about one-quarter as many shares outstanding as BIP.UN may have magnified BIPC’s gains, reflecting supply and demand factors. It’s also possible that BIPC’s stellar performance has created something of a positive feedback loop, where its rising share price attracts more buyers, who push the share price even higher.
However, it’s important to understand that, although BIPC has been the clear winner over the past three years, there have also been periods when it has underperformed BIP.UN – sometimes badly. This tends to happen after the spread between the two has widened dramatically, as is the case now.
For example, on June 30, 2021, BIPC closed at $62.29 on the Toronto Stock Exchange. That was almost a 36-per-cent premium to BIP.UN’s unit price of $45.88 at the time. (Prices are adjusted for a 3-for-2 stock split in June, 2022.) Over the next three months, BIPC tumbled almost 19 per cent, while BIP.UN gained more than 3 per cent. As a result, by Sept. 30, 2021, BIPC’s premium over BIP.UN had collapsed to less than 7 per cent.
It’s anyone’s guess if the same thing will happen now. But given that the spread is similarly extreme today, there’s certainly a chance history could repeat. If you would prefer to avoid that possibility, you could wait until the spread narrows before buying BIPC. However, there’s always the risk that the spread will continue to widen. The stock market has a way of defying even the most well-reasoned predictions.
In closing, let me tell you how I deal with this dilemma: In my personal accounts, I own both securities. BIPC goes in my non-registered account, where the dividends benefit from the dividend tax credit, and BIP.UN stays in my registered accounts, where I don’t have to bother with the more complex tax reporting. One nice benefit of holding both securities is that I am guaranteed to own the one that outperforms.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
John Heinzl